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Suppliers are essential to your business, but they also come with risks.

A late delivery, a sudden bankruptcy, or a compliance scandal can disrupt your operations and hurt your bottom line.

That’s why you need supplier risk management.

It’s a way to stay ahead of these risks and protect your business.

In this guide, we’ll explain supplier risk management, why it’s important, and how to handle it effectively.

We will also go through the most common supplier risk types and shine some light on which suppliers to be especially careful about.

We have a lot to cover, so let’s dive right in.

Understanding Supplier Risk Management

Let’s say you’re running a manufacturing business.

You rely on suppliers to provide quality materials, deliver on time, and stay within budget.

But what if they don’t?

What if a shipment of poor-quality materials causes production delays?

Or a natural disaster leaves a supplier unable to fulfill your order?

Worse, what if a supplier’s unethical practices make headlines and your company gets caught in the fallout?

This is why supplier risk management is so important.

It’s a structured approach that includes:

• Identifying supplier risks early
• Assessing which risks could hit your business the hardest
• Developing plans to mitigate those risks
• Monitoring supplier performance to identify new risks before they harm you

When done well, supplier risk management doesn’t just protect your business from disruptions.

It also saves money, protects your reputation, and ensures compliance with regulations.

Source: Veridion

For example, if a supplier suddenly declares bankruptcy, without a mitigation plan, you’d scramble to find a replacement, risking production delays and higher costs.

But with a good risk management strategy, you’d already have a backup supplier ready to step in.

Given supplier risk management benefits, it doesn’t surprise us one bit that this market is expected to almost double in size by 2029.

Illustration: Veridion / Data: Mordor Intelligence

In essence, supplier risk management will help you stay ahead of the curve and make sure your supply chain is resilient, no matter what challenges come your way.

Types of Supplier Risks

When working with suppliers, the risks can pop up in unexpected ways, and each one brings its own set of challenges.

Here is an overview of the most common supplier risk types, how they affect organizations, and a few real-world examples to bring them to life.

Risk type	Explanation	Why it matters	Example
Operational	supplier production issues, logistical delays, and quality inconsistencies	it can lead to delays in production, poor quality, customer dissatisfaction, and lost revenue	In 2012, Apple faced production hiccups because its LCD screen supplier, Sharp, delayed shipments due to manufacturing difficulties.
Financial	poor creditworthiness, insolvency, or cash flow problems	it can result in bankruptcies or financial strain on the supplier, leading to late deliveries, production halts, or loss of product quality	The bankruptcy of Hanjin Shipping in 2016 caused significant disruptions in the global shipping and logistics industry, leaving goods stranded at sea and companies facing delays and losses.
Compliance & Legal	supplier non-compliance with regulations or legal standards	non-compliance can lead to legal penalties, reputational damage, or the need for expensive corrective actions	In the 1990s, Nike faced backlash and a drop in sales after suppliers in developing countries were found to be using child labor and violating labor laws.
Geopolitical	political instability, changes in trade policies, tariffs, and global conflicts affecting supply chains	it can lead to disruptions, increased costs, or the loss of access to critical raw materials or markets	In response to the U.S.-China trade war and proposed tariffs, Steve Madden is shifting its production away from Chinese suppliers to avoid costly tariffs.
Cybersecurity	data breaches, hacking, and failure to protect sensitive information exchanged between suppliers and the company	it can lead to financial losses, data theft, and reputational harm to the company	In 2013, hackers gained access to Target’s payment systems via a third-party vendor, leading to the theft of 40 million credit card numbers and a major loss of consumer trust.

As you can see, supplier risks are complex and far-reaching.

However, not all suppliers present the same level of risk.

Which Suppliers Pose the Most Risk to Your Business

Some suppliers pose higher risks to your business than others, especially if they provide essential materials, handle or have access to sensitive data, or manage critical systems.

Suppliers of critical materials or services are especially risky, as disruptions on their end can halt your operations.

These risks are even greater if you depend solely on that supplier for key materials.

For example, in 2023, Tesla faced significant challenges when its battery supplier, Panasonic, reduced its production due to slowing demand for high-end electric vehicles.

Source: Reuters

Since Tesla relies heavily on Panasonic for battery cells, the production cut directly impacted Tesla’s ability to manufacture vehicles, leading to production delays and weaker financial results.

As a result, Tesla’s stock fell 34%, illustrating how vulnerable a company can be when it’s overly reliant on a single supplier for a critical component like batteries.

Another high-risk category includes suppliers that handle sensitive data or key systems, such as cloud hosting or financial software.

These suppliers pose a major cybersecurity risk because any data breach or service failure could lead to costly fines, data loss, and severe reputational damage.

In April 2024, Home Depot experienced this firsthand.

Craig Harber, Security Evangelist at Open Systems, explained what happened:

Illustration: Veridion / Quote: SC Media

This exposed Home Depot to a significant risk, as hackers could use the leaked data to launch targeted phishing attacks, potentially leading to a larger-scale ransomware attack on Home Depot’s corporate network.

This breach posed a data privacy risk, meaning Home Depot could face legal consequences for failing to protect its employees’ sensitive data, including potential fines under data protection regulations.

What’s more troubling is that this was not Home Depot’s first incident involving third-party suppliers.

Back in 2014, hackers used a vendor’s username and password to infiltrate Home Depot’s network.

They deployed custom-built malware to steal customers’ payment card data, compromising over 52 million payment card numbers.

The company ultimately paid $17.5 million in a settlement, with additional expenses totaling $198 million for litigation and the cost of handling the breach.

Source: Reuters

Finally, some suppliers can harm your reputation, especially if their practices don’t align with your company’s values.

If a supplier is involved in unethical practices, such as labor violations or environmental harm, your brand could take a serious hit.

For instance, Lush, a brand known for its ethical stance on sustainability and cruelty-free practices, faced a reputational risk when it discovered that its mica suppliers might be involved in child labor.

Despite previous audits and partnerships with NGOs, the supplier changed ownership, and transparency broke down, as the current Director of Buying, Gabbi Loedolff, pointed out at the time:

Illustration: Veridion / Quote: Lush

Lush recognized the risk of being associated with these practices and switched to synthetic mica by 2018 to protect its brand image. 

So, what’s the key takeaway?

The suppliers you need to watch most closely are those that play a critical role in your operations, manage or have access to sensitive data, or could harm your reputation.

Carefully vetting and monitoring these suppliers should, therefore, be a priority.

Steps in the Supplier Risk Management Process

Managing supplier risk may seem complex, but it can be broken down into clear steps.

First, identify the risks related to each supplier.

Gather supplier risk information early on, even during the RFx stage.

You can ask suppliers about their financial stability, operations, data security, and compliance practices through questionnaires, or use external data and audits to get a clearer picture of their processes.

The more relevant data you collect, the better you can spot potential risks.

Next, assess and prioritize supplier risks.

Use tools like scoring systems, risk maps, or risk matrices to evaluate the severity and likelihood of each risk.

Source: Veridion

Andrei Quinn-Barabanov, Supply Chain Industry Practice Lead at Moody’s Analytics, a company offering risk tracking and managing tools, explains how their clients approach this step:

“Our clients usually start with a map based on the financial impact and probability of risks and then add their risk tolerance line. This analysis separates risks that need to be mitigated from those that don’t require expensive treatment and those that can be accepted.”

Overall, this step helps you identify which supplier risks require the most attention and resources to mitigate them.

Once you’ve identified and assessed the risks, it’s time to create risk mitigation strategies.

They could include:

• diversifying your suppliers to reduce reliance on a single supplier or region,
• ensuring you have backup suppliers for critical materials,
• or building strong relationships with suppliers.

Finally, the last step—and a repeating one—is continuous supplier risk monitoring.

Suppliers’ situations and external factors like market conditions can change quickly.

But if you regularly review supplier performance and monitor their activities, you can identify new risks in time and adjust your risk mitigation strategies.

Unfortunately, according to Gartner’s 2019 Third-Party Risk Management model, many companies fall short here, focusing mainly on supplier risk identification during onboarding.

Illustration: Veridion / Data: Gartner

This leaves a significant gap in ongoing risk management, which can lead to supply chain disruptions, declining product quality, missed compliance requirements, and many other issues.

To avoid this, make sure to regularly assess your suppliers and adjust your risk management strategies along the way.

The right technology can help you tremendously here.

Technologies For Easier Supplier Risk Management

Technologies like supplier risk management software, supplier monitoring tools, predictive analytics, and AI are built to help you with supplier risk management.

Here is how:

Supplier Risk Management Software

Supplier risk management software is an all-in-one tool for automating and streamlining risk management.

Instead of piecing together insights manually, this software gathers data from multiple sources, such as supplier performance records, compliance reports, and incident logs.

Then, it presents them in a way that’s easy to understand, as shown in the example below.

Source: SAP

The software can also evaluate risks by assigning scores based on factors like likelihood and impact, showing which risks are most urgent.

This significantly speeds up the process and shifts teams from manual to more strategic work.

Amanda Cohen, VP of Product at Resolver, a risk intelligence platform, explains this:

Illustration: Veridion / Quote: Resolver

With this information, decision-makers can then decide where to invest time and money to mitigate supplier-related risks.

If you want to learn more about these kinds of solutions, take a look at G2’s list of the best third-party and supplier risk management software.

Supplier Monitoring Tools

Supplier monitoring tools, like Veridion, are the second line of defense.

They continuously track supplier data and alert you to any changes that might affect your operations.

Source: Veridion

For example, if a supplier experiences financial instability due to sudden economic changes—such as currency devaluation or sanctions in their country—you would be notified promptly.

That way, you can evaluate the potential impact and take immediate steps to safeguard your operations.

This is especially important because, more often than not, companies don’t get this information in time and face disruptions, as our CEO, Florin Tufan, observed:

“There are numerous instances where companies face downturns or disruptions due to economic or political factors, and their clients often find out too late.”

Veridion prevents this by alerting you about various supplier risks—from regional, operational, financial, and ESG risks down to product risks—just in time.

Predictive Analytics and AI

When you want to move from reactive to truly proactive, predictive analytics and AI are the go-to tools in the current business landscape.

It’s the same in supplier risk risk management.  

Predictive models analyze historical supplier data—like delivery times, quality issues, and financial stability—to flag potential risks.

AI takes it further by integrating external factors, like geopolitical events and natural disasters, into the risk equation, making it possible to foresee disruptions and plan accordingly.

This combination of techniques is exactly how Juan Jose Hernandez Fernandez’s company anticipates supplier risks:

Source: LinkedIn

AI also speeds up access to the relevant supplier data needed for better risk management, especially in situations where you need to quickly source a new supplier in response to a disruption.

As you will now see through our Veridion.

How Veridion Mitigates Supplier Risk With Enhanced Supplier Selection

Veridion is more than just a tool for monitoring supplier risks—it’s also a powerful supplier sourcing provider.

Thanks to AI, Veridion processes petabytes of supplier data every week, giving you the most current and accurate supplier profiles available.

Source: Veridion

The data includes everything from firmographic information to detailed ESG and compliance scores, covering over 120 million suppliers worldwide.

As you can imagine, having access to this level of quality supplier data is a major advantage when it comes to managing supplier risk.

After all, the best way to prevent risk is to choose suppliers who are less prone to risks in the first place.

With Veridion’s extensive database, you can easily find the most reliable suppliers based on your specific criteria.

There are two simple ways to do this:

First, you can use our data discovery service to search for suppliers based on whatever criteria matter most to you—location, keywords, ESG scores, and more.

You can find out more about it in the video below:

Source: Veridion on YouTube

Or, you can integrate our search APIs directly into your existing systems.

Source: Veridion

In both cases, you’ll get up-to-date information on suppliers across key areas, from their sustainability practices and compliance to their financial stability.

This ensures you’re choosing suppliers who are not only reliable but also less likely to face risks down the line.

Another great feature of Veridion is its speed.

In just minutes, you can get a list of suppliers who meet your criteria and dive deeper into their profiles.

And in just a couple of hours, you can be sure that you will choose the best supplier.

Source: Veridion

This speed is especially valuable in situations where you’re dealing with a sudden disruption.

For example, if your supplier is impacted by an earthquake or tsunami, you can quickly find alternative suppliers in unaffected regions who can still deliver the same materials.

In short, Veridion helps businesses manage supplier risks in more ways than one.

If this sounds like something that could help with your risk management needs, get in touch to learn more.

Conclusion

We’ve all heard time and again that suppliers are the backbone of successful procurement, its key ingredient, and so on.

No matter how many times those phrases are repeated, they’re still true.

But sometimes, suppliers’ actions—or external factors tied to the regions they operate in—can seriously affect your company and expose it to various risks.

That’s why you need to keep a firm grasp on supplier risks and do everything you can to avoid or, at the very least, mitigate them.

And that’s why supplier risk management is so important.

Fortunately, there are many technologies available today that can make supplier risk management easier and more efficient.

So, for the sake of your company’s success, make sure supplier risks get the attention they deserve, and manage them proactively.